Chapter 4: Strategy and Strategic Planning

After reading Chapter 4 you should understand the following:

The concept of strategy originates with the art of warfare. According to Webster’s Dictionary, strategy can be defined as, “the science or art of combining and employing the means of war in planning and directing large military movements and operations” or “a plan, method, or series of maneuvers or stratagems for obtaining a specific goal or result.” Companies use strategy and the process of strategic planning to reach their economic, social, and environmental goals.

4.1 The Concept of Strategy

4.1.1 Historical Development of Strategic Planning

Strategic planning evolved from the process of annual budget planning in the 1950s. In the 1960s, fast-growing demand caused companies to extend their planning horizon beyond an annual basis, making long-range planning necessary. For example, when Rich^[1] wrote his textbook on forest products marketing, he referred to long range planning and business strategy. In long range planning, the future is predicted through extrapolation of historical growth.^[2]

Dramatic changes in the business environment, such as the oil shocks of the 70s, required more sophisticated approaches to systems of management. Next came strategic planning where predictions of the future were no longer primarily based on the past.^[3] With this new approach, managers began looking for ”vague signs” or potentially important trends that might impact their operations. When one of these vague signs was identified, its development was followed and its impact was considered in the continual process of strategic planning.

Prior to the the 1980s, most planning was done at the corporation’s executive level. During the 80s, strategy development shifted to operating managers, and strategic management became the common term.^[4],[5] In the 1990s a common term was strategic thinking. Strategic thinking is discovering novel, imaginative strategies and envisioning potential futures very different from the present. In other words, strategic thinking is higher order thinking that should take place to explore potential directions for the company, and strategic planning is the operationalization of those ideas. These two concepts combine to form strategic management.^[6] Scenario planning is a tool for enhancing strategic thinking. Like much of strategy, its roots are in military applications but have more recently been applied in business settings. Scion in New Zealand has used scenario planning to envision the future of the built environment in Australasia (Example 4-1).

It is important to note that individual companies also evolve through the stages listed above. As a first step, companies develop budget plans on an annual basis. As they gain experience in the marketplace, they begin to forecast beyond an annual basis and move toward long range planning. As the expertise of company personnel grows, the tools for true strategic planning and strategic management are developed.

4.1.2 Defining Strategy and Strategic Planning

Strategy is a nebulous concept with multiple definitions and little consensus regarding its makeup. One reason for this difficulty is that the term ”strategy” often refers to different hierarchical levels, such as the corporation as a whole, the strategic business unit, and the product (note that for smaller companies, the corporate and strategic business unit levels may be the same). Strategy is also used in a variety of contexts such as marketing, distribution, or communication and ironically, marketing researchers often do not have a common understanding of strategy.^[8] Although it is a critical part of strategy research, the strategy concept has no universally accepted definition.^[9]

A major difficulty in implementing marketing strategies is that the current definitions are exceedingly vague and provide no guidance for the strategic planning process or the decisions that must be made. Our approach is to view strategy in the context of the decisions a manager must make as well as the information needed to make those decisions. In this way, we begin to illustrate the practical steps that occur in a successful strategic planning process. In this text we emphasize the principle that the strategy concept must tell what should be done when making plans and decisions concerning strategies.

In addition to the varying definitions of strategy, there are many schools of thought regarding how the process of strategic planning actually occurs. Academic research has developed along a dichotomy of rational versus incremental planning.^[10] The rational school believes that a core group of company managers deliberately formulate strategy. The incremental school claims that strategy emerges within a company through its day-to-day activities. Much of the work from the rational school originates from Ansoff^[11], while Mintzberg^[12] is commonly associated with the incremental school. Like Mintzberg, Ohmae^[13] suggests that “effective strategies do not result from specific analyses but from a particular state of mind, a state in which insight and consequent drive for achievement, often amounting to a sense of mission, fuel a thought process that is basically creative and intuitive rather than rational.” In practice, strategic planning will be unsuccessful unless both of these aspects are incorporated.^[14]

When viewing strategy from outside the company, the distinction between these two concepts is not so critical. Even if strategies have not been developed through a logical process as described in the rational school, they can nevertheless be seen in the activities of a company. In other words, even if strategies have not been defined, company activities and their results can be used to characterize strategies.

4.1.3 The General Nature of Strategy

Although there are differences in definitions for strategic planning and strategy, some general features of strategy can be outlined. There are many classifications or definitions of strategy. For example, Niemelä^[15] identified the following approaches to strategy:

• Strategy as an atmosphere or a framework
• Strategy as a plan resulting from a formal planning process
• Strategy as a position
• Strategy as a pursuit of competitive advantage
• Strategy as a pattern of decisions and actions

The following review separates approaches to strategy into three simple categories from general to specific. The categories parallel historical development of the strategy concept.

Strategy as a Framework or Atmosphere

Particularly in the 1950s and 1960s, it was very common for firms to view strategy as an atmosphere or framework that influences all the activities of the company. Strategy directs all the decisions made in the company, but it does not define what kind of decisions are strategic. This approach does not define what to do when planning strategies. Instead, it more generally describes norms, attitudes and “the way of thinking” in the company. Thus, the term “strategic” came to be almost synonymous with “important.”

The idea of strategy as a framework can be seen in Figure 4-1, where it is referred to as a tool of management. The functioning of a company is based on its business idea (mission), and is aimed towards specific goals within a framework formed by strategy. Strategies are defined by top management and are based on analysis of internal and external conditions.

For example, in small companies management may not recognize the necessity of defining specific strategies, and may instead form strategies spontaneously as a sum of the targets and principles of action.^[16] On the other hand, when strategy develops over a long period, as if by itself, it forms a spirit or atmosphere. The existence of a spirit or atmosphere affects decisions and actions, developing into principles and guidelines by which the long-term goals of the company are to be achieved. The choices made in a company can be described by pairs of concepts like aggressive – defensive, active – passive, or innovator – follower. The atmosphere has also been described with expressions like “production-oriented strategy,” “business-minded strategy,” or “marketing-oriented strategy.”

Strategy can be described as laying the groundwork of general principles through which the company tries to secure its competitive advantage, customers, and fully utilize its resources.^[17] This demonstrates three cornerstones of strategic thinking: customer attraction, competitor consideration, and company resources development. However, when using a framework concept of strategy, the actual contents of the strategy often remain undefined. The definitions describing strategy as a framework or atmosphere are not operational. Making inferences and decisions concerning strategies require strategy concepts with clear ways of measuring them.

Strategy as an Adjuster Between a Company and its Environment

Kotler defined market-oriented strategic planning as “the managerial process of developing and maintaining a viable fit between the organization’s objectives, skills, and resources and its changing market opportunities. The aim of strategic planning is to shape the company’s businesses and products so that they yield target profits
and growth”.^[18] Here he emphasizes a basic characteristic of strategy – as an adjuster between a company and its environment (Figure 4-2). This view of strategy has become common since the 1960s, but in most cases, how the adjustment takes place is left unspecified.

The pioneering work of Ansoff^[19] has had great significance as the precursor of nearly all analyses of
strategy. The “adjuster” idea was evident in his early work. The “ecological model” of strategic planning presented by Thorelli and Becker^[20] demonstrates well the close connection of a company and its environment and strategy as an adjuster. Their basic idea is that every company, like all biological organisms, is dependent upon its environment. The satisfaction of people’s needs is the only reason this environment needs companies. Customers, therefore, have a specific emphasis in this model.

According to Thorelli and Becker^[21], goals give direction for setting strategies. The results of everyday activities are the measures of the effectiveness of those strategies. If the results are unsatisfactory, the strategy is not functioning correctly as an adjuster between the company and its environment, indicating that the strategy must be further developed. Although the authors define strategy as an instrument in the adjustment process, they do not define strategy thoroughly. Strategy is said to be the approach or position that a company takes in order to succeed in its actions. Again, this definition is somewhat insufficient because it is not operational, it does not specify what must be done when making plans and decisions concerning strategies.

Strategic position is closely related to the relationship between a company and its environment. A strategy directs a company into a certain relationship or “strategic position” within its environment. A change in the company’s environment forces management to pay attention to its strategic position. Management must then evaluate the product/market combinations with which the company operates.

Strategic positions and ways of change are often described using “Ansoff’s Window,” presented in Figure 4-3.

A company can develop its strategic positioning in four ways:

• By developing current activities (market penetration) the company tries to strengthen the position that its products have in current markets.
• Market expansion (market development) is a way to develop strategic positioning where new markets are sought for current products, either by finding new customer groups or by finding new market areas.
• Product expansion (product development) is a way to develop strategic positioning by offering new products and/or significantly improved current products to current markets.
• Diversification means moving into new business areas, usually by buying companies from areas or fields with better growth possibilities.^[22]

Practical examples of these strategies are provided in Example 4-2. Typically, companies follow several at the same time. In fact, pursuing market penetration, market development, and product development at the same time is a sign of a progressive, well-run company.^[23]

Ansoff’s concepts of strategic positioning have inspired many followers. For example, portfolio analysis in connection with strategic planning is clearly based on Ansoff’s preliminary work. How portfolio analysis can be used when choosing strategic business areas, products or markets will be described later in this chapter.

Precise and operational definitions of strategy were emphasized by Ansoff^[26] when he defined it as a move or series of moves that a company makes. Thorelli and Becker^[27] refer to the same idea when stating that the best strategies are those that are based on the use of relative advantage and aim at satisfying precisely defined customer needs. Efforts to precisely define strategy led to consideration of the components which constitute strategy. These components should be well-defined and measurable, as discussed in the next section.

Strategy as Strategic Decisions

Ansoff^[28] provided a starting point for the analysis and development of strategy components and strategic decisions. In his opinion, the traditional definitions of the common thread of the company based on mission and the business concept of the firm are too loose and vague. As a replacement, he developed a strategy system composed of the following four components:

• Product/market scope
• Growth vector
• Competitive advantage
• Synergy

Product/market scope is the starting point for the definition of strategy. It defines the product area of the company and the markets to which the products are offered. The growth vector defines the direction of company development. The competitive advantage utilizes the finding of product and market areas, and determines which markets best match the characteristics and strengths of the company, giving it a strong, competitive market position. Synergy is produced by the proper combination of various resources and actions. A successful combination can give the company more possibilities and resources than any of its resources or actions used separately.

The marketing strategy definition we use takes a modular approach. In other words, marketing strategies are made up of several key components, as Ansoff’s work suggests. Careful definition of the product/market area is an essential point of the modular approach. It is worth noting that three of Ansoff’s four strategy components are primarily marketing oriented; product/market scope, growth vector, and competitive advantage. Only synergy refers to the internal use of research and production resources.

According to the concepts of Shirley et al.,^[29] the five key decisions that make up a company’s marketing strategy are:

• Customer mix
• Product mix
• Geographical limits of market area
• Competitive advantage
• Goals (evaluation criteria)

This approach stems from the same ideas that Ansoff puts forth, but adds aspects which make the strategic decisions more detailed and operational. When a company defines its strategy, it defines the products, customers, geographical limits of the markets, and competitive advantages on which the use of marketing tools will be planned. It also defines the goals which the company tries to achieve through its actions within these four parameters. All these decisions together put the company in a particular strategic position and define the company’s relationship with its environment. It must be emphasized that although this relationship is defined by strategies and goals, the method for obtaining this relationship is not yet established. All five decisions are closely interrelated. Depending on the marketing ideology, each decision is given a certain weight. For example, when the marketing ideology is  customer-oriented, the most important of these five decisions is the choice of customers.

The product can be tailored through its physical characteristics as well as through its service offerings which fit the requirements of the customer. According to Webster^[30], the product and customer decisions a company makes are influenced most heavily by the company’s competitive advantage and market area strategy. This suggests hierarchical differences between the strategy components mentioned above.

It is possible to show the meaning of Ansoff’s concepts like market penetration, market development, and product development, using the five strategic decisions mentioned above and the concept of strategic position discussed earlier. The strategic decisions (1-5) define strategic position. If the company plans to move from one strategic position to another, it requires, for example, market penetration, new market development, or new product development which Shirley et al.^[31] regard as marketing strategies. Strictly speaking, those concepts define the scope, direction, or nature of behavior carried out under a given strategy, but the content of that behavior must consist of functional factors. Various marketing functions are thus planned to carry out the chosen marketing strategies.

Even when company executives have not defined a specific and explicit strategy, it is possible to infer what the strategy is. Inferences can be made by examining the products, customers, and market areas of the company, as well as the marketing measures it is executing. How this concept of strategy as strategic decisions (product, customer, market area and core competencies) can be used in practice will be discussed broadly later in this chapter.

4.2 Corporate Strategy

As mentioned earlier, confusion has been created because strategic decisions on various hierarchical/ organizational levels of the company have not been well differentiated. We speak of strategies at three levels: corporate, business unit, and marketing (functional). This is somewhat complicated because the number of organizational levels varies within companies, mainly dependent upon the size of the firm. Large forest industry companies consist of four levels – corporate, division, business unit, and functional. Small companies often consist of only corporate (business) and functional levels.

4.2.1 The Idea and Process of Corporate Strategic Planning

Large forest industry companies typically consist of several business units or several groups of business units (e.g., divisions) operating as one financial entity. Business units can be from the same or different branches. Economic and financial questions are generally handled by corporate management, and strategic planning is particularly important at this level.

To increase manageability, the corporation is often divided into divisions. For example, International Paper has the following structure:

• Industrial Packaging
• Papers
• Cellulose Fibers

And, Canfor has:

• Solid Wood
• Pulp and Paper
• Energy

We describe corporate and division-level strategies together because the same principles can be applied in both cases. Instead of speaking of functional level strategy, we adopt a marketing-centric approach and speak only of marketing strategies. Later we will show how business strategies and marketing strategies are interrelated. As a result, we have two different situations for strategic planning: 1) planning corporate strategies and 2) planning marketing strategies. The most important reason for  separating the two is that, especially in large companies, corporate and marketing strategies are planned and implemented on totally different organizational levels. Corporate strategy is the responsibility of top corporate management. Marketing strategies are planned and implemented on a business unit and product level. Of course, division of management responsibilities is closely related to company size. In small companies, the corporate strategy planning resembles business unit and marketing strategy planning. In this case, instead of using the term “corporate strategy,” it is more appropriate to speak of “company strategy” or “business strategy.”

Corporate strategy defines the scope of the firm with respect to the businesses, industries, and markets in which a company will compete. Overall, corporate strategy answers the question “Which industries should we be in?” and, therefore, competition is an essential element of corporate strategy. Corporate strategy should be planned so that resources are used most efficiently to convert distinctive competencies into competitive advantage.^[32] To define strategy on various organizational levels, strategic decisions on each level must be defined. This follows our leading principle that the definition of the strategy concept must tell us what we do when making plans and decisions concerning strategies.

The following summarizes the definition of corporate strategy and the differences between corporate and marketing strategy. According to Ansoff, careful definition of the product/market area is an essential component of strategic planning. He suggests that strategic decisions are those which define the business area in which the company chooses to operate. These two comments can be used to distinguish corporate from marketing strategies. At the corporate level, product/market decisions are made with respect to the business area or industry chosen. At the business unit level, product/market decisions are clearly made with respect to products to be produced and customers to be served. When the business unit or marketing manager is considering what kind of products to offer, the corporate CEO considers which divisions, industries, businesses, or strategic business units to invest in or divest.

This idea is illustrated in Figure 4-4. At the corporate level, the product is defined as structural panels and the customer as the construction sector. These definitions become much more precise at the marketing level.

With this background in mind, we can list the basic phases of corporate strategic planning:

• Corporate mission definition (4.2.2)
• Strategic business unit (SBU) or strategic business area (SBA) definition (4.2.3)
• Evaluating the current business portfolio and making strategic conclusions/decisions (4.2.4)

4.2.2 Mission, Visions and Values

At the corporate level, strategy primarily consists of decisions regarding the businesses that the company should be in and what resources should be allocated to those businesses. These allocation decisions are guided by the company’s mission, vision, and values which provide overarching guidelines regarding the kind of organization the company wants to be and where it wants to go in the future. The concepts of mission, vision, and values are interrelated and their interaction should be the guiding light for the company’s strategy development.

Mission – In a basic sense, the company mission answers the question, “why does the company exist?” Only with a clear definition of the mission and purpose can a business begin to make clear and reasonable objectives. The mission is the foundation for all that follows. Answering the question “what is our business?” seems simple, but the answer is typically less obvious, and may include answering other questions like “who is our customer?” Often, various executives within a company will give very different answers to this question. This is one reason why it is so important—the process of developing the mission brings management together towards a common purpose.^[33]

Companies within the forest industry often have very similar missions, but this actually violates one of the primary purposes of such mission statements. Companies should attempt to differentiate themselves from their competition. This differentiation is possible if each company considers its unique history, core competencies, and environment when developing its mission statement. Public relations should not be the primary purpose of a statement of mission. The mission should also be achievable, realistic, and motivating, so that it can provide guidance for both employees and managers.^[34]

The mission should focus on markets rather than products, which means that it should concentrate on the broad class of needs that the company is seeking to satisfy (Example 4-3). General mission statements and the difference between a product orientation and marketing orientation can be shown as follows.

Paper mill

• We make paper (product orientation)
• We serve magazine printers (marketing orientation)

Sawmill

• We make sawn timber (product orientation)
• We make wood components for joinery companies (marketing orientation)

Manufacturer of prefabricated houses

• We make wooden houses (product orientation)
• We create comfortable living places (marketing orientation)

Vision – When a company is founded, it is based on the vision of the owners. The vision statement helps maintain the original concept of the company and its future development. The vision is almost an “impossible dream,” yet it is simply a reality that has not yet come into being.^[37] It provides a picture of what the future should look like, and guides the organization’s leaders toward that future.^[38]

The vision statement must indicate a clear understanding of where a corporation is today and how it should proceed in the future. It should be seen as the primary corporate motivation, rather than profit.^[39] Vision statements should be action-oriented, present- and future-based views of the dreams of executives. Unfortunately, these days vision statements are often no more than advertising slogans.^[40]

An example of a forest industry company vision comes from ATS Timber in New Zealand: “To ensure all stakeholders needs are considered for generously with a culture of continuous improvement and profitability.” This shows the stakeholder focus of the company is balanced against the profit motive.
A vision statement is a mental image or an assumption of the desirable future state of an organization. It is a motivating tool in founding the company and maintaining the development and framework that guides decision-making. It enables differentiation from other organizations and forms a point of comparison against which achievements, culture, and behavior can be evaluated^[41] (Example 4-4).

Value – a value is “a belief in action,” which means a decision is made about what is good or bad, important or unimportant. Every organization has values, realized or not, and values guide the operations of organizations. The values of an organization are usually based on those of top management. Values should be documented, consistent, practiced and honored; otherwise, the organization is in danger of managers following only their personal values.^[43] Values can be said to reflect the sense of identity of an organization.^[44] They should be clear, simple, direct and easy to understand.^[45]

Values of an organization can be divided into three groups: ethical values, responsive values, and profit values.^[46] Ethical values concern the environment, society and employees, while responsive values emphasize the benefit to customers. Profit values stress the economic point of view and the benefit to owners. Values might include providing opportunities for employee development, creating a safe working environment, or maintaining environmental friendliness.^[47] Roseburg Forest Products operates using three basic values: 1) Sawdust in the Veins, 2) Handshake Integrity, and 3) Driven to Win.

Business values are statements that specify common rules and set boundaries for an organization by defining what is right and wrong and what is important. Business values reflect the organization’s sense of identity and define both internal and external behavior of the organization, making them vital to the organization’s culture^[48] (Examples 4-5).

While the mission and vision may seem like grandiose statements with little meaning or practical use, how a company defines itself can have a dramatic impact on its success. These statements communicate the values and intentions to all stakeholders. Levitt^[49] provides examples of how companies or industries have defined themselves too narrowly. For example, he discusses the challenges facing the railroad industry in the U.S. in the late 1950s.

The railroads did not stop growing because the need for passenger and freight transportation declined. That grew. The railroads are in trouble today not because the need was filled by  others (cars, trucks, airplanes, and even telephones), but because it was not filled by the railroads themselves. They let others take customers away from them because they assumed themselves to be in the railroad business rather than the transportation business. The reason they defined their industry wrong was because they were railroad-oriented instead of transportation oriented; they were product-oriented instead of customer-oriented.^[50]

In the mid-90s, Louisiana-Pacific Corporation went through a series of difficulties and changes in top management. The results of these changes brought about a significant shift in its corporate strategy. A decision was made to divest the paper side of the company’s business and to concentrate on being a building products company. Similarly, Scandinavian companies that once produced magazine paper now produce “solutions” for their publisher customers. While this may seem like an insignificant issue, the difference in culture between these two world-views can have a dramatic impact on firm performance.

4.2.3 Strategic Business Unit (SBU) or Strategic Business Area (SBA) Definition

A business unit is the basic unit for which business and marketing strategies are created. The term “profit unit” is used if independent responsibility for returns or profits is emphasized. In smaller companies there may be only one business unit, in which case the terms “company” and “business unit” are often used synonymously.

The terms SBU and SBA have been created for strategic planning purposes. A strategic business unit can be a single unit or collection of related businesses. The decisions in portfolio analysis are targeted to strategic business units. The SBA and SBU concepts are closely related. The strategic business unit is responsible for developing the strategic positioning on one or more SBAs. Abell^[53] defines SBA in terms of three dimensions: (1) customer groups that will be served, (2) customer needs that will be met and (3) technology that will satisfy the needs. Ansoff^[54] adds geographical location to the list.

The difference between an SBU and an SBA can be explained through the company philosophy: production- versus market-orientation. In corporate strategic planning, a production-oriented company emphasizes SBUs while a market-oriented company emphasizes SBAs.

Example:

SBU – wood component mill or wood industry division

SBA – wooden furniture material business or wood construction material business

Figure 4-6 shows that when an SBU defines its marketing strategy it defines its SBA at the same time. The business of a corporation is composed of the SBAs of its SBUs or groups of SBUs.

Since the 1990s the general direction in the forest industries has been to concentrate on core businesses. Many multi-industry corporations have renewed their strategies and now concentrate only on forest-based industries. In the late 1980s, a Finnish multi-industry corporation Rauma-Repola started developing its corporate strategy by listing its strategic business units (also referred to as industry groups or business areas):

• Forest machinery
• Industry valves
• Rock crushing equipment
• Machinery for forest-based industries
• Grain harvesting equipment
• Offshore oil drilling products
• Printing papers
• Special papers
• Special pulps
• Sawn timber and value added
• Trading of wood products
• Plastic packaging and foils

By the year 2000, after a series of mergers, acquisitions, and divestitures, Rauma-Repola was part of UPM-Kymmene corporation which primarily consisted of the following three groups of business units called business areas:

UPM-Kymmene Printing Papers

Magazine papers, newsprint and fine papers.

Converting Materials

Label, packaging and envelope papers and converting units

Wood Products

Sawmilling and joinery, plywood, and building suppliers trade

A fourth group, called Resources, included operations such as chemical pulp, wood procurement and energy. Reflecting changing times in the market, today UPM refers to itself as “The Biofore Company” and its operations are organized around three areas:

Energy & Pulp

Energy, Biofuels, pulp, forest & timber

Paper

Publishers, printers, merchants, converters

Engineered Materials

Label stock & RFID, plywood, wood plastics

This structure is a result of corporate strategic planning, including the definition of SBUs and SBAs.

Strategic Accounts – Restructuring Corporate Strategy

Strategic accounts are normally connected to customer choices in strategic marketing planning. If a company’s customer choice is certain known end-users, these customers can be called strategic accounts or key customers. Strategic accounts are generally defined as those customers with the highest value to the company.

Strategic accounts are important at the corporate level of planning because of the size and power of the biggest customers. They might be global or multi-national companies using centralized and harmonized supply processes and preferring one-stop-shopping. Ongoing globalization and consolidation have increased the size of both forest industry companies and their major customers. Big paper users (printers and packagers) or big DIY chains can be larger than even the biggest paper or wood products producers. Very large customers are strategically valuable for the entire corporation and their needs should be taken into consideration in corporate planning.

Strategic account management is a method for dealing with very large customers. Because some mills or divisions may be too small to satisfy the multi-faceted demands of very large customers, the solution must be created at the corporate level. When a market-oriented corporation is making decisions concerning SBAs, the starting point could be a strategic account instead of a traditional end-use sector. In other words, a strategic account may mean that one key customer forms an SBA. Strategic account-based SBAs can actually impact the corporate organizational structure. This means that the whole corporate strategic planning must be market-oriented and more closely resembles strategic marketing planning.

Figure 4-7 depicts the difference between a traditional SBU-based SBA definition (left triangle) and a more modern SA-based SBA definition (right triangle).

In traditional production-oriented approaches, the SBU is the starting point and it serves several industrial end-users. SBU formation follows traditional production- or product-based borders. This kind of SBA definition means that one industrial end-user may belong to several SBAs of the supplying company. The customer may need to follow several business practices (of the various SBAs) even though it does business with only one supplier.

To simplify this situation for the customer (strategic account), the company can build the SBA around one (big) SA. Mills from various divisions serve the SA. The customer relationship is managed so that all the business procedures are harmonized and the concept of “one-stop” purchasing can be realized. In this way the company creates one “face” that is seen by the customer.

Strategic account-based corporate strategic planning limits the possibilities of marketing planning and coordination on lower company levels. Division level management must take accounts identified by corporate management into consideration in their marketing and production plans. Division level management may identify their own strategic accounts. At the mill or product level, planning the decisions of corporate and division managers must be taken into consideration before separate customer decisions can be made. Again at this level, managers may have their own strategic accounts.

Strategic account-based corporate strategy requires that the company and the customer share information and align many of their processes. Mutual trust and cooperation are needed to form a working, rewarding, and long-term partnership. The structures and functions of the company are planned so that they effectively implement the strategic account-based strategy.

4.2.4 Evaluation of the Current Business Portfolio and Making Strategic Conclusions/Decisions

Portfolio planning is the process of evaluating the current portfolio of business units. The results of the portfolio analysis give corporate managers the necessary information to appropriately allocate resources among the business units in the portfolio (Example 4-6). Two major portfolio tools discussed below are the Boston Consulting Group (BCG) Matrix and the General Electric (GE) Business Screen.

Boston Consulting Group Matrix

One of the most famous portfolio matrices is the Boston Consulting Group Growth-Share Matrix. The matrix is made up of four quadrants based on market growth (a general measure of market attractiveness) and market share (company position). As can be seen in Figure 4-8, the quadrants are typically named Cash Cow, Dog, Question Mark, and Star, representing the potential of business units or product in that category. A “Star” is a business unit or product that demonstrates high growth and in which the company has a high market share – an ideal situation for the company. On the other hand, a “Dog” business unit or product is in a low growth market and the company has a low market share, a considerably less ideal situation for the company

Also in Figure 4-8 is an example of how this matrix might be used to evaluate a company’s portfolio of business units. Lumber is low growth and the company in this example has a low percent market share, so it can be considered a “Dog.” Oriented strandboard and I-joists are both “Question Marks” since the company does not have a very large market share as compared to the competition and market growth is high. The company has several business units it considers “Cash Cows.” This should mean the company is in a position to invest in the “Question Marks” to move them towards becoming “Stars.”

General Electric Business Screen

Instead of market growth and market share, the GE Business Screen uses market attractiveness versus SBU strength or position (Figure 4-9). The matrix can be divided into four or more cells depending on the level of detail deemed necessary. As shown in Figure 4-9, there are different recommendations for decisions regarding an SBU, depending on its position.

Placement of SBUs on the BCG Matrix or the GE Business Screen allows company planners to evaluate where to invest and divest. To learn how strategic choices are made, we follow a GE-type portfolio analysis in a specialty paper and converting division of a forest industry company. The top management of the division uses the following criteria to evaluate the general business attractiveness and company position.

Criteria for evaluating general business attractiveness:

• Market growth
• Market size
• Profitability
• Indispensability of the products
• Role of environmental issues
• Entrance threshold
• Degree of concentration of the competitors
• Geographical scope
• Negotiation power of the suppliers
• Degree of innovativeness

Criteria for evaluating relative position:

• Company’s market share
• Company’s technological level
• Quality of company’s R&D function
• Company’s cost structure
• Customer relationships
• Marketing know-how
• Organizational effectiveness
• Degree of integration
• Geographical location
• Effectiveness of distribution
• Profit

Using the above criteria, the current business units are located on the portfolio matrix and evaluated (Figure 4-10). The next step in the divisional strategic planning process is strategic conclusions or choices (Figure 4-11). In this case the following recommendations are made:

Divest (low market attractiveness and weak strategic position) – For products/businesses that clearly are losers or that the company has found it cannot effectively manage, divestment is the logical choice. This means selling the business unit. The company cannot make money with these products/businesses, and it is likely that the situation will not change in the future. These businesses deserve to be divested so that the company can concentrate on its core businesses. In this example the company chooses to divest the following SBUs:

• Stationary
• Sack kraft (paper + sacks)

Maximize cash generation, limited investment to extend lifetime (low market attractiveness and strong strategic position) – The basic idea with this option is to milk the SBU for resources that can be invested elsewhere. The company decides that in the long term, this product/business does not show promise and therefore deserves little or no investment. However, there is enough market for the product/business that it makes sense to continue to produce it, gaining whatever volume of sales will naturally occur. This option creates the risk that customers who rely on that product/business will not be happy to learn that the company plans to eliminate it. In our example the company chooses this approach for the following SBUs:

• Industrial wrapping paper
• Consumer packaging

Organic growth, minor acquisition to round off position (high market attractiveness and strong strategic position) – This option means maintaining the current position of the product/business. In our example, the following SBUs were seen to be in a maintenance or hold position.

• PE paperboard
• Self adhesives
• Standard packaging

Major acquisition or minority joint venture (high market attractiveness and weak strategic position) – For SBUs representing attractive markets but relatively weak position, the best decision may be to build a better position; that is, to increase market share and further improve the competitive position in that marketplace. In our example, the following two SBUs are considered to represent opportunities for building a better position.

• Paperboard
• Digital papers

The forest industry recently underwent extensive consolidation and companies are carefully considering how consolidation will progress. If a company has a weak position in a sector where a large competitor is aggressively acquiring capacity, they have an additional reason to exit the business area. For those product areas in a strong position but where business attractiveness is weak, it is best to simply maintain the status quo and use the cash produced by these businesses to invest in others. For attractive business areas in which the company has a strong position, it should plan to maintain growth and watch for opportunities to add to the businesses to make a more complete package. In our example, digital papers and paperboard are attractive business areas in which the company has a weak position. In this case the company should look to jump-start its operations and production. This way the company aggressively builds markets for products that will be strong in the future.

It must be remembered that matrices such as these are only a generalization of reality, and the recommendations cannot always be implemented. For example, many companies would consider softwood lumber to have low attractiveness and since it is such a fragmented sector, few companies can claim to have a strong position. In this situation, placement on the matrix would suggest that the unit be divested. However, there are many reasons why a company may not want to exit the production of softwood lumber. Sawmills typically serve as an outlet for higher-grade logs purchased by the company and as a source of chips and other by-products for paper production. Limited resources may mean the company can only implement some of the recommendations. In the example in Figure 4-10, the company may not be able to deal effectively with building its paperboard and digital paper operations simultaneously. It may have to prioritize one or the other.

4.3 Business and Marketing Strategy

Business and marketing strategy are closely related. Business planning consists of two parts, marketing planning and production planning.

Marketing Planning:

• Strategies
• Structures
• Functions

Production Planning:

• Strategies
• Raw material procurement
• Production
• Finance
• Personnel

Because marketing is the link between a company and its customers and the company lives only through its customers, marketing planning dominates business planning. This means that in market oriented business planning, marketing strategies are directing the whole business planning process. Because of the dominating role of strategies, we can call it strategic business planning. In Figure 4-12 it can be seen how strategic business planning is composed of strategic marketing planning and (strategic) production planning. The same marketing strategies are directing both. In business planning of market oriented companies, marketing strategies are planned first and they are always a top management issue.

It is important to note that because the basic issues are very similar regardless of the hierarchical level of strategies, portfolio analysis is also applicable at the business and marketing strategy levels. Rather than evaluating an SBU, the tools are used to evaluate the situation with a specific product or product line.

4.3.1 Porter’s Generic Competitive Strategies

One way to define the basic approach to business strategy is using Porter’s^[55] three generic strategies:

• Cost Leadership – a company pursuing this strategy will concentrate on reducing costs wherever possible and will practice tight cost controls. Typically, the company must also have highly efficient facilities and strong pursuit of experience-based cost reductions. Little would be spent on research and development, service, or advertising.
• Differentiation – a company pursuing this strategy strives to create a product that is perceived across the industry as being unique. Pursuing this strategy does not mean ignoring costs, but cost reduction is not the primary goal.
• Focus – with a focus strategy, a company concentrates on a specific buyer group or geographical market. The first two strategies aim towards industry-wide advantage, while focus is concentrating on a specific segment or niche. In this way, a company pursuing a focus strategy is able to essentially develop a low cost or differentiation strategy specific to its target segment.

A company that isn’t clearly pursuing one of these strategies is seen to be “stuck in the middle” and finds itself in a poor strategic situation. Implementing one of the generic strategies requires total commitment and appropriate organizational structures that become diluted if multiple targets are pursued. A number of researchers have looked at the forest industry from the perspective of these generic strategies (Example 4-7). A common finding is that many companies appear to be “stuck in the middle.” More recent research suggests that the Porter view of strategy may not adequately describe the strategic actions taken by forest industry companies.

Clear connections can be found between Porter’s strategy concept and the modular strategy concept applied in this book (Table 1). Empirical studies suggest that in many cases it is difficult for companies to separate between few, well-specified customer segments and known end-users. The basic issue is if the company is selective or not in its strategic choices. This is also connected to a company’s marketing philosophy. A commodity product strategy is associated with a production-orientation and marketing decisions are rarely selective. Special and custom-made strategies are expressions of a market-orientation and marketing strategy decisions are selective. This is similar to Porter’s thinking. Cost leadership clearly emphasizes a production-orientation, and marketing issues are of minor importance. Differentiation and Focus strategies require marketing expertise and reflect a market orientation and selectivity in marketing decisions.

Table 4-1: Relationship between Porter’s Strategy Concept and the Modular Strategy Concept

4.4 Strategic Product Decisions – Products to Produce

One of the most basic decisions facing a company is what product to produce. If a company decides that it will produce hardwood lumber, for example, there are still a huge number of decisions that must be made before it can determine exactly what the product will be and which services to offer.

4.4.1 The Concept of Product

The Total Product

Early in the evolution of marketing, the term “product” simply referred to the physical object a company manufactured. In today’s highly competitive environment, companies must have more than just a good physical product. They must also provide an array of services associated with it that combine to form what has become known as the total product.

To understand strategic product decisions (product differentiation) we can think of products ranging from the core product to the total product (Figure 4-13). This is similar in concept to the levels of product proposed by Levitt.^[61] The following list corresponds to Levitt’s categories and is based on Kalafatis et al.^[62]

• Core product (the basic product, such as sawn wood)
• Generic product (softwood sawn wood to be used for manufacturing moulding)
• Expected product (minimum purchase condition, sawn wood of certain dimensions and species, packaged and delivered to meet specifications)
• Augmented product (an enhanced product based on the addition of special services such as credit or special delivery).
• Potential Product (everything that one might do to add value to the product)

The concept in Figure 4-13 is a way of looking at the product emphasizing that it is not only the physical piece resulting from the production process. In other words, we can consider a product to be a bundle of benefits satisfying customer needs. At the most basic level, the core product is the unimproved physical product. Through additions of either physical improvements or services and information, the product can move toward being a total product. The total product concept implies that a product is not ready until it is at the disposal of the customer accompanied by necessary information and service.

Traditionally, quality has been considered a critical element of the total product concept and an important differentiator among producers. However, it has been suggested that in today’s global business environment, where total quality management is virtually a given, product quality is also a given. This view suggests that product quality can no longer be used to differentiate among producers and ceases to be a source of competitive advantage. According to this notion, high product quality is simply a license to operate in the marketplace and provides no benefit to the producer.

While it is true that quality expectations are high in the modern marketplace, quality across the various aspects of a total product still present opportunities for competitive advantage. Achieving competitive advantage through quality requires an understanding of customer quality requirements, a method for measuring how well the company meets those requirements, and a strong commitment to do both.

Forest industry companies seldom systematically measure customer perceptions of product and service quality. Those that go the extra mile can put themselves in a position, through high product and service quality, to differentiate their product from the competition. In other words, a minimum standard may get you in the market, but superior quality is the only means of achieving competitive advantage.

The product concept above emphasizes the idea that product planning should be a shared responsibility between production and marketing. Naturally, customer needs and preferences and company  capabilities are the most important starting points in product planning.

The Product Life Cycle

The product life cycle phenomenon is important from both a market attractiveness perspective and from a company-strengths perspective. Products progress through a life cycle similar to biological organisms. A typical product life cycle would follow the pattern shown in Figure 4-14. At introduction, the profitability of a product is negative due to investment to bring the product to market. As growth in demand increases, early investments are covered and the product becomes profitable. During maturity, the product should be profitable enough to contribute to the development of new products. A company should have a balanced set of products with respect to their relative stages in the life cycle. If a company is loaded with mature products and none in the introduction or growth stage, it is not well positioned.

At each stage of the life cycle, certain competitive conditions can be expected. At Introduction, there are few or no competitors. As the market growth of the product begins, it attracts competitors into the  marketplace and the fight for market share begins. By the time the product reaches maturity and growth slows or stops, companies fight to maintain their market share and will tend to emphasize efficiencies and  maintaining low cost. During decline, some competitors will leave the marketplace and the  remaining ones will be selective in where they attempt to sell the product.^[63] One incentive for  maintaining a product during the decline stage is the exit of competition and the potential to develop a small but dedicated market.

An example from the North American industry can illustrate where various products fit along the product lifecycle. Nanoscience is in its infancy but some products have been commercialized such as cellulose nano-crystals used as an additive to the paper-making process. These products are at the early introduction stage of the product life cycle. Thermally treated outdoor products and wood plastic composites are in the growth stage. Wood I-joists are nearing maturity in the US marketplace while OSB has fully entered maturity. Softwood plywood is generally in the decline stage of the life cycle.

The stage of the lifecycle of a product is one indication of market attractiveness. Generally a product in the growth stage would be more attractive than a product in decline. It must be noted that this evaluation must be kept in the context of the company in question and the specific market in question. A product might be declining when considered at a global or national level, but be in the growth stage in a specific country. A product in its decline stage may be very valuable to one company and not another, depending on each company’s product mix and marketing abilities. The product lifecycle can also be used as a means for measuring company position. A company with a balanced portfolio with products in each of the stages is better positioned than a company with products only in maturity and decline. The latter company may face a bleak future.

Product Differentiation

Branding, product quality, and superior service are all ways of differentiating a product. Making the product somehow different from the competition, in a way valued by the customer, can create an advantage. Figure 4-15 illustrates the Product Differentiation Spectrum. Any product can be placed along the spectrum, depending on the extent to which it is differentiated from other products. One end of the spectrum is occupied by true commodity products. True commodity products do not differ among manufacturers. They are standardized, so if you buy 10 from one company and 10 from another, they will all be essentially the same. Thus, competition for commodity products is based solely on price, with no other differentiation among manufacturers’ offerings.

At the other end of the Product Differentiation Spectrum reside specialty products. A true specialty product is unparalleled by any other manufacturer’s offering. In reality, few products can be classified as either true commodities or true specialties. Most products fall somewhere between the two extremes. Products that compete primarily on price are considered less differentiated and will generally be referred to as commodities (many primary wood products fall into this classification). Products that cater to a specific market segment are considered more differentiated and are called specialties.

Competing on price alone is extremely difficult. Large, integrated companies are best suited to this strategy, as they can access considerable resources and develop significant economies of scale. They prosper by building significant market shares rather than achieving high profit margins on each unit sold. Small companies generally cannot successfully compete in mature commodity markets, so they are left with either playing initiating roles in market development and then exiting when competition increases, or differentiating their product offering to make price less of an issue.

The product life cycle complicates product differentiation. Any truly new product introduced to the  market will, by its very nature, be a specialty product. It will meet the needs of a specific group of customers and the lack of competition will mean price plays a lesser role in influencing customer preferences. As the product matures, competitors will introduce similar products and price will begin to play an increasingly important role in guiding customer purchase decisions. Thus, the product life cycle forces products to become less differentiated. Without action, the product may eventually become a commodity. To ward off this effect, companies must use marketing tools to further differentiate their products and move them back toward the specialty end of the product differentiation spectrum. As a general rule, the more successful the product, the more quickly competitors will invade and force a product toward commodity status. Thus, product differentiation must be a continuous process.

An example from the Finnish plywood industry illustrates this process. When plywood with a polyethylene film was first introduced, it was used as concrete forms and was considered a specialty product. As competitors entered the market, the product eventually moved down the continuum towards being a commodity. At this point, companies began to look for the next specialty application and found that the same product with a few extra features could be used in special applications in the ship building industry. Although it meant entering a new market entirely, marketing to ship building companies was a successful way to move the product back to a specialty.

Product differentiation and market segmentation (discussed below) are related concepts. Products are differentiated because there are different needs among various markets and customers. Markets are segmented to find homogenous customer groups for a differentiated product.

Branding

Forest industry companies have become increasingly focused on differentiation through the creation of product brands. For example, the CEO of Stora Enso Timber explained that their goal is not to be like all the others, but to gain competitive advantage through differentiation. At the time, the company was increasing its value-added production and slowly eliminating bulk sawn wood.^[64]

Differentiation through the physical product alone is becoming increasingly difficult. For example, in the paper industry large companies are often using the same paper machines and paper technologies. Because they are producing from a common base and strive to achieve very high physical product quality levels, it is rarely feasible to differentiate in this area. In this case, differentiation must be built on other features. Emphasis must be placed on various elements of the total product. The features of the total product must be combined under one coherent identity with an associated and identifiable name—a brand.

Traditionally, individual paper mills have named their products and in Europe, sawmills have used shipping marks. However, most of these product names or shipping marks have no value as brands. As the industry has consolidated, these names and marks have become more difficult to use since each company might have many to choose from. It can cause confusion for both the customers and the marketing personnel. Branding can be a solution to this problem. Thus far, forest industry brands are mostly regional and can’t be compared to well-known global brands like Coca-Cola, IBM, or Nokia. The largest forest industry brands are for consumer products such as diapers, tissues and feminine hygiene products (Pampers/Always).

The word brand comes from an old Norse word brandr, meaning “to burn.” Brands were, and still are, the means by which owners of cattle mark their animals as their own. The American Marketing Association defines a brand as follows:

“A name, term, design, symbol, or any other feature that identifies one seller’s good or service as distinct from those of other sellers. The legal term for brand is trademark. A brand may identify one item, a family of items, or all items of that seller. If used for the firm as a whole, the preferred term is trade name…”. http://www.marketingpower.com/.

A brand has multiple functions: to distinguish products from each other, to show the product origin, and to provide a guarantee of quality, value, and performance.^[65] A brand represents a promise that the product will satisfy customer needs. Brands can provide value for the company as well as customers. Companies have realized that their real value lies outside the business itself, in the minds of present and potential customers.^[66] For a modern, market oriented companies, it is more important to own markets than mills. Market ownership can be facilitated through brands.

4.4.2 Choosing the Product Strategy

Based on the concepts introduced above, there are several basic product strategies that a company can pursue. Companies can choose to emphasize commodity products, special products, or custom-made products (Example 4-8). Generally these can be defined in the following way.

Commodity Products – products that meet basic overall industry standards and are not adapted or specialized in any way. The customer can move from one producer to another without difficulty.

Special Products – products that have been adapted to fit the specific needs of an individual sector. This might mean softwood lumber of the quality and sizes specifically needed in the window industry.

Custom-made Products – products that have been specifically developed to meet the individual needs of a customer. In this strategy a manufacturer produces a product to the mutually agreed upon specifications of an individual end-user.

It should be noted that division among commodity, special, and custom-made products is marketing based. From the same technical product, various strategic options can be developed through technical or marketing modifications in the same way as the total product is developed from the core product.

The following is an example of product strategies in the paper industry. A paper grade can represent various product strategies as was found in a study by Kiskonen^[68] (Figure 4-16). Light weight coated (LWC) paper is produced as a commodity, special and custom-made product. Super-calendered (SC) paper is a commodity product. Machine finished coated (MFC) paper is a special product and  medium weight coated (MWC) paper is produced both as a special and custom-made product.

The basis for the strategy classes can be explained in the following manner:

Light Weight Coated

• Commodity product when the product is produced with standard characteristics.
• Special product when the product has special grammage or special lightness with some grammages.
• Custom-made products take customer wishes into account like bulk, shade, opacity or shine.

Super-calendered

• Commodity product because the quality differences are small and the product is easily substituted by competitor products.

Machine Finished Coated

• Special product because of the following characteristics: very low grammage, expensive, difficult to produce, very good shine contrast/lightness, few producers, different from competitors’ products.

Medium Weight Coated

• Special product because of characteristics like grammage, lightness, shine and opacity.
• Custom-made product because of tailor-made characteristics of the product, such as gloss and roughness.

The following is an example of product strategies in the sawmilling industry, where the emphasis of product strategy is gradually moving from commodity products to special and custom-made products. The prerequisites of this development are changes in production technologies and marketing philosophies and better knowledge of markets and customers. As a production philosophy, special and custom-made product strategies imply that the producer “gives up producing sawn timber.” Instead, the sawmill produces raw material, semi-finished goods and components for industrial end-users (e.g., window manufacturers and furniture manufacturers). We use as an example of a sawmill producing blanks.

A blank can be defined as a piece of sawn timber meeting the requirements of industrial end-users such as dimensions, quality, drying and deliveries. The blank can be manufactured to an end product or its component without sawing.

If the end-users are known and the product requirements are mutually agreed, we call the product custom-made. Natural partners for sawmills are joineries and furniture manufacturers. Quality requirements are exactly specified and the blanks are compatible with the products and production
processes of the partners.

It is a clear strategic choice when a sawmill invests in a blank producing mill. Figure 4-17 illustrates connections between traditional Scandinavian sawn timber grades and types of blanks. Blanks produced for known window and door manufacturers, furniture manufacturers, and edge-glued panel manufacturers are custom-made products. They are produced according to the dimension and quality requirements of the known customers (partners).

The high quality clear pieces and the low quality knotty pieces are marketed as special products. A special product is not tied to a known customer but, for example, to certain end-use sector. Users of clear decorative blanks could be manufacturers of moldings and high quality decorative panels. Knotty versatile blanks could be used for packaging or fences. The profitability of special products can vary significantly according to the market situation and the skills of the seller.

In market oriented marketing planning, the attractiveness of product choices is analyzed in connection with customers. We suggested earlier that customers and products are the most important components of SBAs. However, profitability is closely connected to all marketing decisions. Profitability of various products must be calculated and followed regularly. Today modern information systems make this monitoring possible.

Development/Progress of Product Strategies

Recall that the more selective a company is regarding its product strategy, the more likely it is to be producing custom-made products. A highly selective company must also be highly sophisticated in its marketing abilities. Over time, as a company builds its knowledge base and looks for increased financial returns per unit of output, it will naturally become more selective or focused. A good example of this phenomenon has occurred in the Finnish sawn wood industry during the past two decades.

The shares of special and custom-made products in Finland increased dramatically during the 1980s and early 1990s. In the early 1980s, product strategies of softwood sawmills were nearly 90% commodity with the remainder being special products. By 1992, commodity products had dropped to 64% with special at 24% and custom-made at 13%. Product strategies and production respectively have developed steadily towards special and custom-made products, and this development continues today.

4.5 Strategic Customer Decisions – What Customers to Serve

Every company has a broad range of potential customers. It is important to identify those customers that fit well with the competencies of the company or, in other words, that the company can serve well. This means that there are clearly customers that for one reason or another the company should choose not to serve.

4.5.1 Basic Customer Decisions

At the most basic level, the choice regarding customers can be placed in the following three categories. Once again, selectivity is key.

As Many Customer Groups as Possible – an unselective customer strategy is logically matched with a commodity product strategy. An MDF mill that sells its products through several wholesalers would fit this category. Although one could view the wholesalers as a few customers, they are not the real end-users and are simply an intermediary on the way to the product’s final destination. In this example, the mill does not know the final users of its products.

Few, Well-specified Segments – a more selective customer strategy where a company has identified a few segments of the market that it will serve. For example, the MDF mill may choose to target the furniture, cabinet, or laminate industries.

Known End-users – the most selective strategy. In this case, the MDF mill knows the specific customers that it targets. It might have three key customers in each of the previously mentioned industry sectors. Logically, companies pursuing this customer strategy would also be producing custom-made products for those customers.

In production-oriented companies where marketing has been of minor importance and marketing skills are not well developed, an unselective customer strategy tends to be the natural choice. The marketer does not know the customers. However, increasing competition has forced companies to emphasize marketing and customers. Thus, market and customer knowledge has increased, the notion of total product has been strengthened, and genuine selective customer choices have been made. Companies have realized that the victor in competition is the one that best and most efficiently fulfills customer needs and requirements.

In some industry sectors conducting business-to-business marketing, known end-users has been a natural choice for a long time. However, the structural changes among industrial customers have made this customer strategy even more important. Through consolidation, the size and power of customers has increased and it has become more logical to choose individual companies as customers. If these known end-users are especially important to the company, they may be designated as key or strategic accounts.

The rationale of choosing known end-users is that concentrating on the most valuable customers makes good business sense. The customer interface and especially strategic accounts, which usually account for the majority of sales, are essential for the successful business in the long run. Building long-term customer relationships is the focus for market-oriented companies. Known end-users as a customer choice is also supported by the fact that retaining customers is less expensive than acquiring new ones. One of the main challenges companies face is retaining the chosen customers, creating loyalty, and assuring that the accounts are profitable. When identifying the most important customers, or strategic accounts, a number of criteria can be used:

• Economic value such as revenue or profit
• Future business potential
• Learning value (the customer demands and facilitates product and process development)
• Reference value (channel for new business)
• Strategic value (access to new markets, building barriers to entry, etc.)^[69]

It must be emphasized that strategic account management is not a separate part of strategic marketing. Strategic accounts are part of the strategic marketing plan and marketing structures and functions must be designed to implement this strategic option.

4.5.2 Basis and Methods for Choosing Customers

Segmentation

To choose which customers to serve, the marketer must be able to separate customers into appropriate groups. The basis for separation could be similar needs, similar behaviors, or other characteristics. Customers should be chosen so that the strengths and possibilities of the company fit the needs of the customer group as well as possible. In marketing planning, we call this kind of grouping market segmentation. Market segmentation means dividing heterogeneous total markets into homogeneous parts or segments.

The characteristics of the groups used in segmentation are called segmentation criteria. Segmentation criteria must have significance in the choice or use of products. They must be easily recognizable and observable/measurable so that the segments can be separated. For example, in marketing children’s playhouses, the segmentation criteria might distinguish families who live in detached houses from those in apartments; those with children ages 3-12 from those without children, and so forth.

In industrial marketing, segmentation is often done simply by following the lines of industry sectors. A softwood plywood producer might divide the markets into segments like concrete forms, transportation, and housing. For a hardwood plywood producer, those segments might be cabinets, furniture, store fixtures, and retail.

Segmentation can also occur within an industry sector. Furniture manufacturers, for example, have different product needs based on the type of furniture that they produce. This could be the type of products or components they buy or the species they use. By learning the differences among various manufacturers, a hardwood lumber producer can begin to specialize its product offerings to target various segments of furniture manufacturers.

Do-it-yourself home centers typically target two major segments, final consumers and contractors. They may offer special services and price discounts to contractors that are not available to final consumers. By offering a contractor desk and catering to the special needs of the contractor customer, they are able to increase the business they conduct with that segment while at the same time maintaining a separate set of services and benefits to the regular consumers entering their stores.

Profitability-Based Customer Analysis

Market segmentation often helps firms identify new customers. Historically, finding new customers has been the primary emphasis of marketers, but today the emphasis is often placed on keeping and growing current customers. This is easy to understand because the cost of attracting a new customer is much more than the cost of maintaining an existing one.

Often the customer base of a company is a result of historical development more or less by chance, and marketers are often reluctant to change that, especially if it means dropping some customers. This is understandable because of the personal relationships often developed with long-term customers. However, the customers must represent some level of profit to the company. A company should regularly follow the profitability of its customer base.

A clear motivation for following the customer base is the fact that all customers and customer segments are not bringing the same level of profit to the company. Management literature often cites the Pareto principle (80/20 rule) where 80% of profits come from 20% of the customer base. This implies that many of the 80% of companies in the customer base may actually represent losses to the supplier. For companies conducting customer profitability analyses, it has been a surprise to discover that as much as 80% of their customer base is actually unprofitable.^[70] Companies must constantly monitor customer-based profitability. The customer base can be seen as a portfolio, which can be developed and optimized to increase its total value. In some cases, it may be necessary to drop a particular customer completely or begin a process to grow that customer to a profitable level. This process requires that the reasons for unprofitability can be identified and that, for example, reallocating marketing resources targeted toward that customer will be effective.

The essence of customer profitability analysis is the ability to describe the customers that are profitable and those that are not. This requires a significant amount of specific information. Advanced marketing-accounting information systems are needed that can assign costs in an appropriate fashion. With the right systems and database, the profit performance can be determined by market segment, customers, products, and territories.^[71]

When developing the profitability-based sales steering system for Stora Enso Varkaus mill, Keinänen^[72] analyzed the profitability of various basis weights, countries, customers and customer groups. She noticed that there were notable differences among the profitability of various basis weights. The target countries could be grouped into two segments with regard to their profitability. In addition, customer groups but especially individual customers varied remarkably as to their profitability.

An Example of Evaluating a Sawmill’s Customer Segments

The strategic planning of a sawmilling company connects the strengths and abilities of the company to the needs of the customer. The strengths and abilities can also be connected to the raw material base or production technology of the mill. The needs of the industrial customer can be derived from the requirements the end product or production process place on the raw material. When planning product and customer strategies, marketers must know precisely their own strengths and weaknesses, products and production processes, and the needs of potential customers. The sawmill attempts to choose that kind of industrial customer that provides a total fit between the customer’s products, production process and production philosophy and the sawmill’s products and operation philosophy.

Earlier we considered planning of corporate strategies using portfolio matrices. In principle, choosing customers is a similar planning situation. With respect to strategic business areas, we examine end-use sectors with corresponding products. The end-use-sectors could be window manufacturers, furniture manufacturers, edge-glued panel manufacturers or planing mills. The criteria for the attractiveness of these sectors must be developed. Correspondingly, instead of relative position we consider the strengths and weaknesses connected to the products, production, and marketing of the company.

A Finnish sawmill was developing its marketing to France. Based on pre-analysis, the following product/customer options were chosen for detailed analysis:

• Special sawn timber for window shutter manufacturers
• Special sawn timber for door manufacturers
• Custom-made planed timber for certain timber merchants or importers
• Special sawn timber for planing mills
• Custom-made sawn timber for certain glulam beam manufacturers
• Custom-made sawn timber for construction element manufacturers
• Custom-made sawn timber for pre-fabricated housing manufacturers
• Custom-made sawn timber for furniture manufacturers

Dimensions, lengths, quality and moisture content were the basis of development for special and custom-made products from commodity products. The attractiveness of the product/customer options as possible customer targets were analyzed as shown in Figure 4-18. In the matrix the scores vary between 1 and 5. If the total consumption of the product/customer option (e.g., special sawn timber for planing mills) was high, it received a rating of 5. If development of demand was moderate, it received a rating of 3. If it were not at all special/custom-made product oriented, it received a rating of 1. Every product/customer option was scored on each attractiveness criterion. By adding the scores, a total score for attractiveness was created. The abilities, strengths, and limitations of the company’s own production processes were taken into consideration, and each criterion was weighted accordingly. The information concerning French markets and possible target companies was acquired through market research. The research contained both analysis of secondary material (desk research) and analysis of primary material (interviews in France).

4.6 Strategic Market Area Decisions – Where Do We Operate?

As in customer decisions, there is a wide range of possible geographical markets that a company can choose to target. However, the competencies of the company as well as issues such as distance and available distribution methods will dictate which areas are most attractive and feasible.

4.6.1 Basic Market Area Decisions

A company can choose to target as many regions or countries as possible or a few, well-specified countries or regions.

As Many Countries or Regions as Possible – an unselective company simply manufacturers a product and sends it out to wherever there may be an interested buyer.

Few, Well-Specified Countries or Regions – a selective company concentrates on a few market areas where it can create an advantage.

Operating on a very broad market area is a questionable strategy even for companies applying a commodity product strategy. Successful marketing presupposes some kind of marketing efforts. If the resources are sprinkled over a broad market area, there is no possibility for effective marketing anywhere. The broadness of the market area is also connected to market information and market knowledge. Marketers must know their markets. If the marketer is operating in too many market areas, his or her knowledge will be insufficient in some and operations cannot be totally effective.

For example, a Nordic softwood lumber company could easily market its products in middle and southern Europe, Northern Africa, North America, and Japan. In fact, many companies have pursued all these markets at once. For most companies pursuing this sort of strategy, it means that about 80% of their production is going to two or three key countries and the rest is a mix of very small users. This is not a selective strategy. A company pursuing a selective strategy would see the investments made to market the 20% to multiple countries as inefficient. Instead, it would place its full concentration on a few specific market areas and work to develop its expertise there.

Globalization has had a major impact on market area choice. Global companies have a totally different situation when choosing market areas than local companies that only market domestically or even those that export. This is because the customer base has changed to also include global companies. This development has been fast among customers of the forest industry and will likely continue in the future. The business units of global corporations are not choosing their market areas independently and are not exporting in a traditional sense. They are part of the corporation’s international business in which market area selection has a different frame of reference than traditional in-country or export marketing.

4.6.2 Basis and Methods for Choosing Market Areas

It is not enough to define market area strategy as, for example, “a few, well-specified countries or regions.” The marketer must further define the specific countries or regions the company will target. Segmentation can be used in conjunction with market area selection, sometimes called macro-segmentation. When evaluating and choosing market areas, we can use similar methods to those used in choosing SBAs in corporate strategic planning. The method outlined in Figure 4-18 may be used also when evaluating and choosing market areas. The central criteria describing the attractiveness of a market area are based on the macro-environment of markets: demand and supply of markets, and other macro-environment (economic and technological development etc.). The microenvironment of markets (competition, distribution systems and customers) also affect the attractiveness of a country or a region.

When making strategic decisions we must keep in mind the basic situation of strategic marketing planning described in Chapter 3. The information environment is always the starting point, and we must consider what kind of information is needed.

Generally speaking, countries with a high level of technological development and strong purchasing power are attractive targets for advanced industry. The more developed the markets, the better a  company can apply advanced product and customer strategies, and the more likely it is that competitive advantages are based on knowledge, skills, and technology.

4.7 Core Competencies – Pursuing Competitive Advantage

Strategic strengths, core competencies, and the competitive advantages connected to them are central issues in strategic thinking. To operate profitably in the long term, a company must have competitive advantages based on its own unique characteristics and conditions. Operations are then based on these competitive advantages. A core competency is a characteristic of the company, production process, product, or features of marketing based upon which the company is able to beat the competition (Example 4-9). When a core competency is identified or created, it can be exploited with effective marketing.

Customer needs and their satisfaction is the most important factor influencing strategic product decisions. When the demand for products is increasing quickly, marketers pay most attention to products and customers. When the increase of demand slows, the competition for market share tightens. Under these conditions, the importance of core competencies and competitive advantages increases. Core competencies have a special role among strategy components. Other strategy components combined with company resources are ingredients of sustainable competitive advantage. According to Ansoff’s work, total fit between company resources, products, and customers create a sustainable competitive advantage (Figure 4-19).

A company must be better than competitors in some unique way that is relevant to marketing, particularly in customer decision-making and customer relationships to possess a competitive advantage. If the unique expertise of the firm is not important to the customer, it does not constitute a competitive advantage. The reality of competitive advantage is that it must fit the context of customer needs.

Figure 4-19 implies how company resources (mainly personnel) are important both in creating excellent products and in creation of strong customer relationships. The fit between products and customer relationships means sustainable competitive advantage through creating customer satisfaction—the main goal of marketing efforts. Because customer relationships are more difficult to copy than products, marketers place high importance on customer relationships.

Recent forest sector research has focused on the Resource-based View of the Firm (RBV). According to the RBV, firms are heterogeneous with respect to resources under their control and a competitive advantage results when a firm possesses a tangible or intangible resource that is rare, valuable, cannot be imitated, and is difficult to substitute. Example 4-10 outlines examples of tangible and intangible resources found in the forest industry.

4.8 Strategic Marketing Planning – Making the Pieces Fit

4.8.1 Interrelationships of strategy components

The relationships among strategy components must follow a certain internal logic. The first component of Ansoff’s^[74] strategy concept is product/market scope. The component implies the vital link between product and customer decisions. Figure 4-20 demonstrates the principles of relationships between product and customer strategies.

Clearly, it isn’t logical to produce special products and market them to all possible customer groups. Special products are marketed to those customer groups for which they are planned (e.g., window components to window manufacturers). By definition, custom-made products are made for known customers.

Figure 4-21 describes how strategic market area decisions are connected to product strategies.  Commodity products are marketed to as many countries as possible. Special and custom-made products are marketed to few, specified countries or regions. However, it could be that a company marketing  custom-made or special products to known end-users or specified sectors could operate worldwide. An example of that kind of company might be a plywood mill producing special plywood for the shipbuilding industry. Customers might be all shipyards building a specific type of vessel.

Core competencies must be compatible with other strategy components. Applying certain product, customer or market area strategies may require certain strengths or core competencies. The combination of strategy components creates a synergistic effect. Figure 4-22 describes the kind of strengths required when a company is choosing among strategy options. Though it’s a simple view, the principles illustrated here can be analyzed. A commodity product strategy requires strengths connected to products and production, in which case cost and price are the basis of competition. A special product strategy requires strengths connected to the products but also in marketing capability. Custom-made product strategies require special in-depth knowledge of individual customers but technical know-how is also important.

4.8.2 Connections Between Strategies, Structures and Functions

The Integrated Model of Marketing Planning introduced in Chapter 2 emphasizes that strategy is the basis of all business functions, particularly marketing. Structures and functions are tools to implement strategies. The logic of the model emphasizes that strategies drive the structures and functions of an organization, and that if there are changes in strategies, there must be corresponding changes in structures and functions.

The following list describes empirically observed relationships between strategies, structures and functions:

Marketing organization

• The more advanced the strategy, the more decentralized the organization.
• Companies applying custom-made product strategy tend to organize their marketing based on customer groups.

In a market-oriented company, decision-making must be nearer the customer. Those responsible for customer relationships must be able to make fast and locally applied marketing decisions.

Marketing channels

• Marketing channels for custom-made product strategies contain few intermediaries and aim at direct contact with customers.
• Companies applying a commodity product strategy have more intermediaries in their marketing channels.
• The more advanced the marketing strategy, the simpler the structure of marketing channels (shorter channel).

In a market-oriented company, connections to the customer must be close to enable a continuous flow of information and influence between supplier and customer. An intermediary may hinder this flow. A commodity product strategy often means wider market areas and lighter organizations, requiring the use of intermediaries.

Personal contacts

• The more advanced the marketing strategy the more systematic and frequent are personal contacts.
• Marketing of special products requires direct contact with customers.
• In connection with a more advanced strategy, personal contacts are with industrial end-users. In connection with less advanced strategy (commodity product strategy), personal contacts are with channel intermediaries.

A market orientation emphasizes customer relationships and customer relationship management. This ultimately means relationships between people. In a production-oriented, commodity product strategy, marketers very often do not know the ultimate end-user and see channel intermediaries as their customers.

Marketing communication

• The more advanced the marketing strategy, the more direct and customer oriented is marketing communication. Accordingly, marketing communication is conducted by the company itself and the target in most cases is the industrial end-user. Communication is connected to product characteristics and use.
• When an unselective strategy is applied, communication is often conducted by channel intermediaries and targeted to other intermediaries. “Making products known” is the dominant objective of communication.

This can again be explained by the principles of market-orientation. A supplier with a market-orientation takes more responsibility for marketing and customer satisfaction. The market-oriented company concentrates on solving customer problems. A production-oriented company concentrates on solving its own production or marketing problems.

Product development

• The more advanced the marketing strategy, the more customer-oriented is product development.
• The more advanced the marketing strategy, the more systematic and regular is product development.
• The more unselective the marketing strategy, the more unsystematic, irregular and raw material oriented is product development.

Specializing and customizing products requires product development.

Pricing

• The more advanced the marketing strategy, the more flexible and customer oriented is pricing.

A differentiated product provides more freedom in pricing decisions, and price can be more dependent on the customer’s idea of value.

Physical distribution

• Advanced marketing strategies are accompanied by terms of delivery emphasizing responsibility of the seller. Terms of delivery emphasizing buyer’s responsibility are connected to unselective marketing strategies.
• The more advanced and customer oriented the marketing strategy, the greater the role of the producer in physical distribution.
• Transportation by trucks is connected to custom-made product strategies. Transporting large volumes (rail, ship) is more typical in unselective marketing strategies.

A market orientation means more supplier responsibility, more emphasis on customer support, more concerns of customer need satisfaction, and more flexibility. This means that the supplier often provides products directly to the production facilities of the industrial end-user.

4.9 Chapter Questions